Some related reading:
....
So it sounds like the suggestion we should be making is not to add gunpowder, but to add explosions. As long as the the game has explosions under the hood and tools to create them, it's trivial to add the reaction for gunpowder and gunpowder devices. The interesting thing is that the more obvious way to create explosions with Dwarf technology is weapons-grade ethanol (booze).
There are 3 types of useful explosions that I can think of,
Concussive - Emits a damaging shockwave but no heat, i.e. compressed air or dynamite. (you get to see a lot of these on MythBusters)
Incendiary - Catches everything nearby on fire, i.e.a gasoline or ethanol explosion.
Shrapnel - The damage from the pressure wave is minimal, but pieces of shrapnel are propelled to smash or cut, i.e. a grenade or grapeshot. This is also essentially how a gun works, but there's only one piece of shrapnel and only one direction it can go.
So in other words, damage with the explosion's pressure wave, set things on fire with the explosion or knock dangerous objects around with an explosion.
It would be interesting to have concussive explosions damage the area around them. Not just buildings and dwarves, but destroy walls and leave craters in the soil, potentially causing cave-ins. It would be like digging, but all at once.
Also, if explosions work the way Toady explains, there's a center of force and everything around it is pushed away, you could just make cannons but digging out tubes, filling one end with explosives and putting a lead bar stockpile inside it.
I also want to point out that while guns are pushing the edge of the technology limit,
rockets are 1000s of years old and could be used for all kinds of dwarfy endeavors.
http://en.wikipedia.org/wiki/Early_thermal_weapons